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2017 (3) TMI 1748

..... for resale - CIT-A took the view that software itself is a ‘secret process’ which is used in data processing and in as such the payment is made for using such process and the payment is in the nature of royalty and alternatively also held that software is a scientific equipment and the payment received being for use of such equipment would be construed as royalty - DTAA between India and USA - HELD THAT:- Respectfully following the legal position as determined by Hon’ble Delhi High Court in Infrasoft Ltd. [2013 (11) TMI 1382 - DELHI HIGH COURT] and Reliance Industries Ltd [2016 (6) TMI 96 - ITAT MUMBAI] we are of the opinion that the assessee has transferred the copyrighted article/ material which does not give rise to any royalty income as held by ld CIT(A) in the impugned order. VARs constituted a PE of the appellant in India - assessee submits that the CIT (A) not adjudicated the ground of appeal raised before him. It was further argued in alternative that M/s Satyam and Compaq are well established company in the field of software services and question of their dependent upon the assessee does not arise - HELD THAT:- CIT(A) has not adjudicate the ground of a .....

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..... ed as royalty ( Ground A to D) (2) The learned CIT(A) erred in not appreciating that Satyam Computer Services Ltd and Agrotech Food Ltd had not deducted tax at source and the Department had accepted this situation without initiating any action against them(E) . (3) The learned CIT(A) failed to adjudicate upon whether the VARs constituted a PE of appellant in India. Without prejudice to the grounds is asked the assessee submits that these VARs cannot be considered PE of the assessee in India as they did not come under the control and direction of the assessee.(F) 3. Brief facts of the case are that Assessee Company is incorporated under the law of Netherlands. The assessee is wholly subsidiary of M/s i2 Technology Inc USA. The assessee obtained the exclusive right to use, develop and enjoy the Intangible property rights to the computer software from M/s i2 Technologies (Cayman Island) Ltd. The assessee filed return of income for relevant assessment year on 17 February 2004 declaring total income of ₹ 3,88,23,854/-. In the return of income the assessee claimed that ₹ 1,28,89,958/- was received on account of licence fee for the sale of software which is not taxable in Indi .....

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..... nly for the right to use the copy right and not for copyrighted article. The Ld Commissioner (Appeals) also took the view that software itself is a secret process which is used in data processing and in as such the payment is made for using such process and the payment is in the nature of royalty. The learned CIT(A) alternatively also held that software is a scientific equipment and the payment received being for use of such equipment would be construed as royalty. It was argued on behalf of assessee that income received by the assessee is not in the nature of royalty, the software license granted by it are in the nature of Shrink Wrapped Software or Packaged Software which does not result in royalty income for the assessee. In support of his argument they learned counsel for assessee relied upon the decision of Hon ble Delhi High Court in case of CIT Versus Infrasoft Ltd[2013] 220 taxman 273, decisions of Mumbai Tribunal in ADIT Versus Ban Global B.V. [2016] 49 ITR(T) 73, Qad Europe BV Versus DCIT 53 ITR(T) 259, ADIT Vs First Advantage Private Limited[2017] 77 taxman.com 195, Galatea Ltd. v/s. DCIT(IT) [2016] 46 ITR (T) 690, International Ltd. vs. ADIT(IT) [2016] 68 taxman.com 97, .....

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..... of favorable decision to the assessee. The ld. DR for the Revenue referred that in Global Tally System Ltd. the Mumbai Tribunal vide order dated 20.04.2016 and Ahmedabad Tribunal in LMT Ltd. (152 ITD 873) has restored the matter back to the file of ld. CIT(A). The ld DR for the revenue also referred and relied on the decision of Hon ble Karnataka High Court in CIT Vs Samsung Electronics Ltd. [2012] 345ITR 494. In the rejoinder argument, the ld. Sr. Counsel of assessee argued that the point of process was considered by Delhi Tribunal in Datamine International in para 10, 11 & 12 and in Qad Europe BV v/s. DCIT 53 ITR(T) 259. The ld. Counsel for assessee further relied upon the decision of special bench in ITO vs. Prasad Production [2010] 125 ITD 263 (Chennai) (SB). 5. We have considered the rival contention of the parties and have gone through the orders of authorities below. During the assessment, the AO asked the assessee to justify the claim of non-taxability of license fees of ₹ 1,28,89,958/-. The assessee filed its detailed reply dated 07.03.3003. The AO observed that Satyam Computer Services Ltd. and Compaq Computer (India) Pvt. Ltd. acted as Value Added Reseller (VAR .....

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..... t in TAta Consultancy Services case' (supra) have thus laid down that Computer programs are the product of an intellectual process, but once implanted in a medium they are widely distributed to computer owners. That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible movable and available in the marketplace. 82. The Supreme Court has further held that a software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods which are susceptible to sales tax. Even intellectual property' once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes and marketed would become "goods". There is no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film in a video cassette/CD. In all such cases, the intellectual property has been incorporated o .....

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..... the computer hard disc drive such movies, books, music, etc. can also be recorded into the permanent memory of the computer. That the information, knowledge, story, or idea, physically manifested in recorded form, can be transferred from one medium to another does not affect the nature of that physical manifestation as corporeal, or tangible. Likewise, that the software can be transferred from one type of physical recordation, e.g., tape, to another type, e.g., disk or hard drive, does not alter the nature of the software, it still has corporeal qualities and is inextricably intertwined with a corporeal object. The software must be stored in physical form on some tangible object somewhere. In sum, once the "information" or "knowledge" is transformed into physical existence and recorded in physical form, it is corporeal property. The physical recordation of this software is not an incorporeal right to be comprehended. 84. To further elucidate the nature of the transaction in the case of the Assessee it is necessary to examine some of the clauses of the Licensing software agreement entered into by the Assessee with its customers: INFRASOFT LICENCE AGREEMENT. 2. G .....

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..... ests for the appropriate information should be directed to the Vice President Technical of Infrasoft. 3. LICENCE FEES, PAYMENT AND TAXES (a) Licensee shall pay Infrasoft a licence fee for the use of the Software as agreed in the order. Infrasoft confirms that where the Licensee has purchased the Software through an authorised reseller of the Software the Licensee shall owe no license fees to Infrasoft where the Licensee has made payment of the licence fees to the authorised reseller. (b) All licence fees are exclusive of and net of any taxes, duties or other such additional sums including, but without prejudice to the foregoing generality, value added/purchase tax, excise tax (tax on sales, property or use), import or other duties and whether levied in respect of this Agreement, the Software its use or otherwise. All such taxes shall be the responsibility of the Licensee and shall be payable in addition to the licence fee. (c) Infrasoft advises the Licensee that the Software contains a mechanism which Infrasoft may activate to deny the Licensee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. 4. ** ** ** 5. .....

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..... does not specifically include the computer software‟ in the term literary work and under such circumstances, if we apply the provisions of Income Tax to define the scope of Literary Work‟, then perhaps the computer software‟ will be out of the scope of the term royalty as defined under the DTAA. However, if we apply the Copyright Act, then the computer software‟ will have to be included in the term literary work‟ but to constitute royalty‟ under the treaty, the consideration should have been paid for the use of or the right to use the copyright in the literary work‟ and not the literary work‟ itself. 42. Further, when we read the definition of copyright and literary work as provided in the Copyright Act, 1957, it is also important to note down that what constitutes infringement of copyright and what are the exceptions to it. If the software purchased by the assessee and the use of it by the assessee is covered within the exceptions as provided under section 52 of the Copyright Act, then in that event it cannot be said that the transfer of right to use or for use of the copyright has passed. The proviso to section 57 of the Copyright A .....

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..... by foreign authors, the copyright does not automatically flow or extended to them. The rights of the foreign author are to be examined in the light of the Copyright Act and the relevant treaty or the convention, if any, signed by India with that country to which the foreign author belongs. The copyright in a foreign product thus does not flow automatically or impliedly, so far as the Indian copyright laws are concerned. 44. Hence, while interpreting the definition of royalty as provided in the DTAA, it is to be seen as to what has been purchased by the assessee i.e. whether the copyright itself has been purchased or what the assessee has purchased is only a copyrighted work . It is also required to be analysed as to whether the use of such right would amount to infringement of copyright if a license or permission in this respect is not given by the owner; and when assessee has purchased a copyrighted product, whether the use of the same for the business purpose of the assessee is covered within the exceptions as provided under section 52 of the Copyright Act. Further, in case of imported work/product, whether the protection of copyright is available to the foreign author in terms o .....

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..... ll be the business income of the non-resident and taxable in accordance with the provisions of DTAA. We may clarify here that even in cases where the owner of the copyrighted work may restrict the use of or right to use the work by way of certain terms of the license/software agreement, the validity or the enforceability of the same may be subject matter in other laws such as Indian Contract Act 1872 , Sale of goods Act 1930 or the Consumer Protection Act 1986 etc., but, the same in any way cannot be said to grant of or infringement of copyright in the light of specific statutory provisions of Copyright Act 1957. 46. While finalizing this order, we have come across a recent decision of the Co-ordinate Delhi Bench of the Tribunal in the case of Datamine International Ltd. vs. ADIT in ITA No.5651/Del/2010 vide order dated 14.03.16 on the identical issue wherein the definition of royalty vis-à-vis computer software in the light of India UK Treaty has been discussed. The Tribunal in para 12.1 of the said order(supra) has observed that in the India-UK Treaty, in para 3(a) of Article 13 which deals with the definition of royalty in the relevant India-UK Treaty, there was no specif .....

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..... pra), that an international instrument affected between two sovereign states is the result of the negotiations by those sovereign nations which in itself is considered to be mini legislation containing in it all the relevant aspects or features which may be at variance with the general taxation laws of the respective countries and the same are to be read as such. We, therefore, fully agree with the observations of the co-ordinate bench of the Tribunal in the case of Datamine International Ltd. vs. ADIT (supra) that wherever the Government of India intended to include consideration for the use of software as 'Royalties', it explicitly provided so in the DTAA with the concerned country viz. Malaysia, Kazakhstan and Turkmenistan. We find that in the cases before us, in the DTAA of India with respective countries (names mentioned in the chart given above), the definition of royalty in none of the respective treaties specifically include any consideration for the use of or the right to use any computer software and therefore, the same cannot be imported or read into it. 48. We may further clarify here that without expressing our opinion or any view in relation to the definition .....

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..... lso be placed in this regard on the decision of Hon ble Supreme Court in Bihar State Electricity Board and another vs. M/s. Usha Martin Industries and another: (1997) 5 SCC 289. We accordingly adopt the construction in favour of the assessee. 51. The Ld. A.R. of the assessee, at this stage, has raised another important argument. He has submitted that the purchase orders for the softwares were made much prior to the year 2012. The dates of purchase orders have been mentioned in the 4th column of the table drawn in initial paras of this order. He has submitted that explanation 4 to section 9(1)(vi) has been inserted by Finance Act, 2012 with retrospective effect 01.06.1976, vide which the right for use or right to use a computer software including granting of license has been included in the definition of the term right, property or information, the consideration paid for which has been deemed to be income by royalty under section 9(1)(vi) of the Act. He has stated that the said explanation though preceded with the phrase it is hereby clarified and is followed by the words includes and has always included yet the said explanation cannot be applied retrospectively. He has stated that .....

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..... y". (b)That the definition of the term 'Royalty' in article 12(3) of the Indo-US DTAA is restrictive than what is provided in section 9(1)(vii) of the Income tax Act, 1961 that in such a situation the provisions of the Double Taxation Avoidance Agreement override the domestic law. (c) That the assessee has purchased a copyrighted article and not the copyright. There is no transfer of any part of copyright (d) As what is paid is not "royalty" under the Indo-US DTAA, and as it is covered Article 7, which deals with "Business Profit" and as the foreign party does not have Permanent Establishment in India, the same is not taxable in India and the assessee is not required to deduct tax at source from the said payment. (e) The present computer software cannot be treated as a patent or an invention. 52. The ld. AR has further relied in this respect on the decision of the Hon ble Supreme Court in the case of Sedco Forex International Drill INC. & Others vs. Commissioner of Income Tax & another (2005) 199 CTR (SC) 320 and also of the co-ordinate bench of the Tribunal in the case of Rich Graviss Products (P.) Ltd. vs. ACIT (2014) 49 taxman.com 531 (Mu .....

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..... aid purchases. The assessee had no reason to believe or to foresee a subsequent event vide which the definition of royalty has been extended to include the consideration for the use of or right to use the software has been included in the definition of royalty under the Act. As per the existing law which was in operation at the time of purchase of software, the assessee was under the bonafide belief that there was no liability to deduct tax in respect of the consideration paid for the said purchase of software. It may be further observed that as the definition as was in existence before the insertion of Explanation 4, there was a remote possibility to give a broad interpretation to the definition of right, property or information so as to include the right to use or right for use of the software in the said definition. The Explanation 4 has brought and added a further meaning to the provision which was not supposed to be foreseen by the assessee. The co-ordinate bench of the Tribunal in the case of Rich Graviss Products (P.) Ltd. vs. ACIT (supra), while relying upon various other decisions of the Tribunal, has held that the disallowance cannot be made under section 40(a)(ia) on the .....

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..... n are also similar. We have already allowed the appeal of the assessee for AY 2002-03 on similar facts. Hence, this appeal is also allowed with similar observations. ITA No. 6449/Mum/2008 for AY 2002-03 9. This appeal is filed by Revenue against deletion of penalty levied u/s 271(1)(c) of the Act. 10. Brief facts of the case are that the assessee in the return of income claimed ₹ 1,28,89,958/- was received on account of licence fee for the sale of software and the same is not taxable in India. The contention of assessee was not accepted by AO and treated the income as royalty and brought the same as taxable income in India. The AO further concluded that out the said income, the income on account of licence fee of software to M/s Agrotech Foods Ltd of ₹ 32,27,028/- is a direct sale and Income on licence fee to M/s Compaq Computer (India) for ₹ 73,27,586/- and to M/s Satyam Computer Services for ₹ 32,35,344/- are value added retail(VAR). The VARs sold these software to Premiere Instrument & Controls Ltd and Maruti Udyog Ltd and the receipt was not offered to tax by assessee on the ground the transaction are in the nature of copyrighted product rather than .....

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